By Fergal Smith
TORONTO (Reuters) – As Canadian inflation slows, will the cost of essentials like food and rent come back in a sustainable way, Bank of Canada economists say , Canada’s 2% target because these items are the main drivers of inflation expectations.
Canada’s December consumer price index report due on Tuesday is expected to show headline inflation cooling to 6.3%, the slowest annual rate since last February, from 6.8% in November .
This is good news for the economy, but analysts say the slowdown is largely due to energy prices and an improvement in underlying inflation is not expected to be too high.
Their focus is on the magnitude of price increases and the more timely three-month core inflation and consumer items in the CPI basket that are important to the economy.
Price increases for food and rent, as well as gas price increases that have slowed down, are very pronounced, so they tend to have a significant impact on inflation expectations.
If inflation expectations rise, it could push up demand for wages, especially if the labor market is tight, leading to further price pressures.
“Central banks, they are shifting the thinking that inflation is going to come down – we know that – but even if it falls below 2%, will that last? ?” said Stephen Brown, senior Canadian economist at Capital Economics.
Price inflation of necessities could keep wage demand high as it affects inflation expectations. “
Brown estimates CPI-trim, one of the Bank of Canada’s preferred core inflation measures, will be on an annual basis in December, matching the pace in November.
The Bank of Canada has vowed to return inflation to target, raising the benchmark interest rate at a record pace 400 to 4 basis points in nine months.25%.Money markets see about a 25% chance of further rate hikes in the January 25 rate decision 25 basis points.
Food prices rose . November was up 3% year-over-year and housing prices were up 7.2%, while the December labor force survey showed an average Hourly wage growth was 5.1%.
“If inflation slows and wage growth does not slow, then wages will be a tailwind for future inflation. That’s what the central bank is more worried about right now,” said RBC Assistant Chief Economist Nathan Janzen.
Economists remain optimistic about a wage-price spiral, or rising wages and prices The long-term cycle is avoidable.
“High inflation is currently having some impact on wages, but is this a long-term problem,2024 and beyond, I think that’s a different issue,” Brown said.
“What we really need to see in December is a broad-based slowdown in price growth. ”
